House Prices - On a Kite, or in Free Flight? An empirical analysis of fundamental price in the Norwegian housing market, and its interaction with actual price.

Abstract

In the past few decades, there has been a considerable increase in real house prices in Norway. It is therefore important to understand what this increase is based upon. In this study, we analyse the relationship between price and fundamental factors of the Norwegian housing market in the period of 1993 to 2022. Applying the methods of Bergman and Sørensen (2021), we estimate a five variable VAR model and compute a fundamental price. We find that prices in the Norwegian housing market have generally been aligned with what fundamentals would suggest across the analysed period. Additionally, we analyse the interaction between fundamental and actual price through a VECM, where we analyse whether there is cointegration between the prices, and if the interaction is consistent with the theory of fundamental valuation. We find that there is a cointegrated relationship, and that we cannot reject the null hypothesis that the relationship is in line with theory. These results are consistent when ending the sample from 2013 to 2022.